“A good case can be made out for short-term government debts under special conditions. Of course, the popular justification of war loans is nonsensical. All the materials needed for the conduct of a war must be provided by restriction of civilian consumption, by using up a part of the capital available and by working harder. The whole burden of warring falls upon the living generation. The coming generations are only affected to the extent to which, on account of the war expenditure, they will inherit less from those now living than they would have if no war had been fought. Financing a war through loans does not shift the burden to the sons and grandsons. It is merely a method of distributing the burden among the citizens. If the whole expenditure had to be provided by taxes, only those who have liquid funds could be approached. The rest of the people would not contribute adequately. Short-term loans can be instrumental in removing such inequalities, as they allow for a fair assessment on the owners of fixed capital.” (Mises 1998: 213).Come again? According to Mises, there is a good case for short-term government debt under special conditions. Presumably, war in legitimate self defence is one of them.
And “financing a war through loans does not shift the burden to the sons and grandsons.” That is to say, the real burden of required real resources for the war “falls upon the living generation” and is “a method of distributing the burden among the citizens.”
Funny, but Abba Lerner said something like this.
But many modern Austrians would say the exact opposite: they argue that government debt for public infrastructure and public works spending now (as in a Keynesian stimulus) impoverishes future generations. Those modern Austrians should have read their Mises more closely!
And a Keynesian would reply that the real burden is only felt by the present generation, because all real resources can only be provided now.
“The coming generations are only affected to the extent to which, on account of the war expenditure, they will inherit less from those now living than they would have if no war had been fought.”This is reasonable in that the future generations will lose both capital goods and (probably mostly durable) consumption goods that could have been produced in place of war materiel.
But the other side of the coin is that allowing an economy to collapse into depression without quick stimulus also impoverishes future generations in exactly the same way: the future generations lose the capital goods and durable consumption goods that could have been produced had stimulus been applied.
The future repayment of money debt is a mere redistribution of income at a future period. There is no way for the future generations to send real resources back in time for us to use now.
What Mises says above is not far from this Keynesian view.
Mises, L. 1998. Human Action: A Treatise on Economics. The Scholar's Edition. Mises Institute, Auburn, Ala.
Anarcho-capitalists would disagree with Mises on the grounds that in their view all government spending whether financed by taxes, debt , or money creation is fundamentally theft no matter what the debt is used to finance.ReplyDelete
Mises is in effects saying that the debt falls both on the present generation (they may give up present consumption to finance govt borrowing) and the future generation (they may not benefit from past capital investments that would have taken place if not for the debt.)
I am surprised that you see this as consistent with Keynesianism. Would Keynsians not consider that govt debt could benefit both the present generation(by allowing otherwise unused resources to be utilized) and future generations (who will have a better capital infrastructure as a result of past govt spending)?
"Mises is in effect saying that the debt falls both on the present generation (they may give up present consumption to finance govt borrowing) and the future generation (they may not benefit from past capital investments that would have taken place if not for the debt.)"Delete
Yes, but Mises is only talking about war spending in the quotation I gave, so with respect to war spending he is right.
"Would Keynsians not consider that govt debt could benefit both the present generation(by allowing otherwise unused resources to be utilized) and future generations (who will have a better capital infrastructure as a result of past govt spending)?"
Correct and this is implied in what I said above:
"But the other side of the coin is that allowing an economy to collapse into depression without quick stimulus also impoverishes future generations in exactly the same way: the future generations lose the capital goods and durable consumption goods that could have been produced had stimulus been applied."
That is, by implication those capital goods and consumption goods also benefit the present generation too, as well as by increased employment.
I found a interesting piece in the Nation for some days ago:Delete
"Nietzsche’s Marginal Children: On Friedrich Hayek
The Nation-.Corey Robin | Professor at Brooklyn College, May 7, 2013
"How did the conservative ideas of Friedrich Hayek and the Austrian school become our economic reality? By turning the market into the realm of great politics and morals."
Thank you very much for posting that. Robin, who I sort of know but don't follow, has it absolutely and completely wrong. I'm going to have to write something on this and run it next week to make sure this doesn't get popular. Thanks again.
And thank you Philip!You done a lot real good writings on the topic!The one on that Neoliberalism could be traced back to the Austrian Mises-Hayek´s big Myth really open up my eyes!Take care mate and Slan!Delete
Classical liberals like Mises knew perfectly well that commerce is expansionist, not war. What Mises said is that war can be necessary or economically convenient **not** because it create wealth, but because minimise destruction. “under special conditions.” means a **defensive** war (you are right on this). If the invader decided to destroy a community, to slave its people and kill its children, it would be totally absurd to receive them softly and try to convince them of pacific cooperation. Even under this **special** conditions, war is not a good thing, but the less evil. Krugman would say that war is economically a +50 for the economy, Mises is saying that with a defensive war you loss -20 and without that defensive war you would loss -120. For some Keynesians war is good for economy, for Austrians a defensive war is the less evil.ReplyDelete
If government invest wrongly (i.e. stimulus), the losses from that bad-investment will be financed with future taxes. “if the government invests funds unsuccessfully and no surplus results, or if it spends the money for current expenditure , the capital borrowed shrinks or disappears entirely, and no source is opened from which interest and principal could be paid. Then taxing the people is the only method available for complying with the articles of the credit contract.”
“allowing an economy to collapse into depression without quick stimulus also impoverishes future generations in exactly the same way: the future generations lose the capital goods and durable consumption goods that could have been produced had stimulus been applied.” This is not true. You “collapse into depression” DUE TO you wasted scarce savings in malinvestments and consumed capital during the period BEFORE the collapse (boom), not because of the collapse itself. Wasting resources in government stimulus only increase the number of malinvestments. “government debt for public infrastructure“ impoverishes future generations because you are wasting capital in bad investments . Spending in a war infrastructure adapted to an alien invasion, is wasting resources in a thing that will provoke losses, losses that will be financed by future taxes. You certainly affect future generations: via decapitalization and by malinvesting today resources in public projects which future losses you will have to finance from future people. And that is exactly what Mises is saying; I don’t see anything odd on this.
I get the impression that Mises says these strange things -- strange given other more well-known statements made elsewhere -- because he doesn't actually understand what he's talking about and he made a career out of being a rather crude contrarian.ReplyDelete
I'll bet that I could find a contradictory quote -- and I mean blatantly contradictory -- in Human Action itself. Mises was a sloppy tinker. I think everyone outside of certain cultish circles recognises that. Almost on par with Hazlitt.
Yeah, I am inclined to agree with you here, though I was still rather surprised when first reading this quote above.Delete
Well, think of it this way: Mises was alive during the war and was living in the US. Human Action was written a few years later.Delete
Every economist in the war years saw clearly the role that government deficits played. Spending that was not backed by taxes in a shortage economy can only produce (a) inflation or (b) can be managed through rationing. In the war years, they largely rationed together with price controls -- but there was some inflation.
It was also obvious that Public Sector Deficits = Private Sector Surpluses (especially in the US, where the external account was in surplus). Now, we can imagine that this reality was being talked about daily in the newspapers with massive private savings building up in banks etc. (A historical book needs to be written on this!).
Given all this, it became VERY obvious in the war years that what the deficit actually does in a time of shortage is that it take resources from the private sector and sends them to the public sector. The whole notion of "paying back" then becomes meaningless. (As Warren Mosler says: "We didn't produce tanks in the 60s and send them in a time machine back to the 40s").
If you live through this experience it is going to leave its mark. Here's my reasoning: Mises accepted this at the time but was too dim/ideological to integrate it into his thinking. This is CLASSIC Mises. You find bits a pieces in his writing that appear to run against the Austrian grain, but they're just the casual observations of a person who read the newspapers in the war years. They are never actually integrated into the ideological framework.
They're like fragments of historical truth in the sea of theoretical nonsense that is Austrian economics.
So in otherwords this guy Mises, made up his plans for what he would think on deep economic issues, based on what was on his mind for the day? Based on his daily emotional state of mind? It seems so to me. One day syndicalism categorized as capitalism, another day is mixed economy pure capitalism, another day is mixed economy Soviet communism and sometimes there is no such thing as a mixed economy. Sometimes military keynsianism is okey another day, it is socialism comparable with Hayek's program in The road to serfdom or Friedman's monetarism. I honestly do not understand what young people get out of reading such an eccentric wacko. If they want to find some wacko economist on the right advocating starvation cures and other means to the torment as many people as possible, can´t they find a better one than this remarkable author of the unreadable book Human Action? It's a mystery to me!Delete
Your bizarre speculation is incorrect. Mises held these views on war funding since at least 1916.
It isn't a "bizarre" speculation, but could just as easily be applied to Mises' s experience of WWI, which your link shows is right:Delete
Mises ... praises the military successes of the Austrian army and the industriousness of Austrian businessmen [sc. during WWI] in providing the manufactured goods required to fight the war. Mises reminds his listeners that borrowing does not enable the current generation to shift any part of the costs of a war to a future generation. Current consumption could only come out of current production, and this applied no less to consumption of finished goods designed for and used in war. Whether the war was financed by taxes or borrowing, the citizenry paid for it today by foregoing all that could have been produced and used if not for the war.
.... Thus, we find Ludwig von Mises explaining why, given the reality of government spending, under certain circumstances government deficit spending may be more desirable (from the taxpayers' perspective) than a fully tax-funded balanced budget!"
Wow. That's a stinker. Three points:Delete
(1) As LK said, my conjecture applies just as well to his WWI statements to his post-WWII statements. You see a strong desire for Mises to be talking sense during the war (and following the patriotic newspaper discourse) but then a complete inability to integrate this into his broader thinking. As I said: that indicates a shallow and fickle mind that changes its opinions as the winds of history change but remains rigid in its theoretical orientation.
(2) Mises argument, on closer examination, is pretty awful. Note how he doesn't seem to understand that government expenditure = private sector income. So, for example, he claims that non-liquid individuals will have to borrow to pay the taxes when, in fact, it is obvious that these individuals would be the ones receiving income from the government expenditure out of which they can pay taxes. I think in Mises' mind the income generated by the government spending must be being sent to the front together with the munitions produced -- haha! maybe the soldiers would use it to throw on no man's land to coax the Allies out into the open and then mow them down with machine gun fire!
(3) This leads to an even worse conclusion: that Mises was really just a total shill. He didn't actually grasp what was going on at all but instead concocted a sloppy argument so that he could flog War Bonds to the Austrian public and remain on the right side of the political fence. AND he didn't even manage to integrate this sloppy argument -- which is equally applicable in peacetime -- into his thinking after the fact.
"he claims that non-liquid individuals will have to borrow to pay the taxes when, in fact, it is obvious that these individuals would be the ones receiving income from the government expenditure out of which they can pay taxes"Delete
Mises point is the that to pay for the war private C and I has to be reduced. This can be done either via taxes or borrowing - and borrowing is likely to share the burden more fairly. You seem to be suggesting that the war can be financed by taxing the people who are being paid by the govt to wage it. That makes no sense if those resources were previously producing private goods.
BTW: Its obvious even from the quote above that Mises did envisage special circumstance other than war where govt debt may be justified. Mises did in fact believe in the role of a state with limited ability to tax and borrow.
Your argument about taxing and spending is incoherent. Sorry.Delete
I think the idea that debt is not a burden on future generations, that it is simply redistributive is only conditionally right. The conditions are that the analysis is made of a closed economy (such as the world economy), or an open economy in which debt is locally owned.ReplyDelete
If you make a national analysis of the economy, foreign-owned debt is a drain on future generations' resources as they need to work harder and send a portion of their production to foreign countries in repayment of those debts.
No. It puts a downward pressure on the exchange rate. This may result in currency devaluation and increased exports/decreased imports, but this need not be the case. There is no real correlation between the trade balance and the value of a currency -- at least not among the advanced Western countries. The downward pressure put on the currency by debt and interest owed to other countries is often far outweighed by fresh capital inflows. This is FAR too lacking in widespread recognition today.Delete
I should add that this is not even widely studied among post-Keynesians. Michael Hudson's work goes in this direction. And from a theoretical I think that there's only John Harvey. I interviewed him here -- not many PKs are familiar with his work which is extremely disappointing.Delete
Just in the spirit of walking before running:Delete
Granting the truth of what Philip says, it is not exactly to the point. Simval84 is right. Of course foreign debt is a burden on a country. That's what debt is. And of course it is on the future of a country. The Post Office doesn't deliver to the past. Lerner & Wray say the same as Simval. Wray praises John Harvey's work to the skies.
If the US were running a full employment economy, then real stuff China would buy from the US with its US debt would constrain US spending, consumption and investment, so even US dollar debt could bite a bit like household debt to a household.
In a depression like now, however, Chinese buying would enrich both countries, because we have practiced nonsense-economics for decades, though not as insanely as Europe.
And to be curmudgeonly: Harvey on Descartes and Newton is mainly just irrelevant, unreliable pop history and philosophy.